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The Trillion-Dollar Company: Apple Business Model In A Nutshell

Apple has a business model that is broken down between products and services. Apple is still a product company where the iPhone represented over 54% of Apple’s revenue in 2019, in decline. Other fast-growing segments are services (digital content, cloud, licensing) and the wearables and accessories (AirPods and Apple Watch).

The Trillion-dollar company

With a market capitalization of over a trillion dollar as of January 2019, Apple is among, if not the most valuable brand in the world.

To gain a bit of context of how big Apple has become if we take the US GDP figure for 2019 at over 21 trillion, this means Apple represents over 6% of the total economic output of the wealthiest country on earth.

If we take Apple, Amazon and Google market cap combined (the total is over $3.2 billion), those tech giants represent over 15% of the total economic output of the US.

Of course, nothing compared to the 1930s, when J.D. Rockefeller personal wealth represented about 1.5% of the US economic output. Yet, there is no doubt that for a few the Internet has represented the new oil.

As large political organizations (I believe states and nations will not be able anymore to slow down those tech giants) like the EU or the US federal government will regulate more and more, the so far not so regulated web, those companies might shrink in size.

However, one might also argue that instead, we live in the era of tech giant corporations, which are political organizations for their own sake (they influence the lives of billions of people). What if they keep growing?

GAFA is an acronym for Google, Apple, Facebook, and Amazon. The term GAFA might have become extremely popular when France’s publishers and media started to use the concept to mean the tech monopolists that control a large chunk of global digital information and online commerce. This is how GAFA made money in 2018.

Apple’s business model is mainly based on the sales of tech products. However, it cannot be understood from that standpoint alone. Apple is both software and hardware, which is also what made it successful. No doubt the iPhone is an icon of our days. Yet, the iPhone is also a device that works pretty well thanks to its software.

If we look at Apple’s growth for 2019, it was primarily driven by segments such as Wearables, Home, Accessories Devices (products like AirPods and Apple Watch) and Services as well.

Apple’s products

It also offers Wearables, Home, Accessories Devices comprising AirPods and Apple Watch. Those devices represented almost 10% of Apple’s revenues in 2019.

Apple’s operating systems

Those products are run by Apple Operating systems:

iOS

macOS

watchOS

tvOS

Apple-related services

And supported by a set of related services:

Digital Content and Services

iCloud

AppleCare

Apple Pay

Services revenues also have grown fast in the last years and they represented almost 18% of the overall revenues in 2019. The most interesting part is that those revenues carry a high profitability for the company, even more than its core products as they follow a platform business model.

The Company sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and value-added resellers. During 2017, the Company’s net sales through its direct and indirect distribution channels accounted for 28% and 72%, respectively, of total net sales.

Key takeaways

Services: the services business comprisesprimarily: 1.Digital Content Stores and Streaming Services,comprising purchases on the App Store but also subscription services like Apple Music, Apple TV. 2.Other services comprise AppleCare+(“AC+”) and theAppleCare Protection Plan,which are fee-based services that extend the coverage of phone support eligibility and hardware repairs. 3.Apple’s Cloud Services(iCloud), 4.Licensingwhere Apple licenses the use of certain of its intellectual property and provides other related services. And 5.Other servicesincluding Apple Arcade™, a game subscription service; Apple Card™, a co-branded credit card; Apple News+, a subscription news and magazine service; and Apple Pay, a cashless payment service.

Apple has a diversified business model broken down in products and services.

Even though the iPhone sales still represented 54% of the overall sales for 2019, the company also offer services and subscriptions which are growing substantially.

The services business has a high marginality, even higher than the products business of Apple. This makes it interesting for Apple to keep pushing its growth in the coming years.

As Apple’s sales of iPhone slew down substantially in 2019 compared to 2018, the company also pushed more on tech accessories (AirPods particularly) which offset and were the fastest growing business segment (41% growth compared to 2018).

The accessories business has become a unit of over $24.4 billion and growing.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy |
Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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